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What the umbrella company bashers just don't get

Villains guilty of exploiting workers! Middle-men pirating off the backs of professionals! It might surprise you if you’re using one, but these depictions are being used to describe the typical umbrella company, and they’re unfair, writes Graham Fisher of Orange Genie.

These pieces almost always treat umbrella companies as nothing more than outsourced payroll and, in doing so, they’re falling for -- or seeking to exploit -- a common misunderstanding about umbrella pay.

How an umbrella company works

Specifically, they misrepresent the charge out rate -- this is the amount paid by the agency or client to the umbrella company, and the employee’s gross pay rate -- this is the amount paid to the employee before deductions for tax and Employee National Insurance.

To help clear up any misunderstanding, this is how an umbrella company actually works:

The umbrella company employs the worker. The worker becomes a permanent employee, and has all the corresponding rights and protections.

The agency or client pays the umbrella company a charge out rate for the contractor’s time. This rate, by law has to include the contractor’s pay, the umbrella company’s profit margin and the costs of employing the worker. These costs are not singular --- they should include Employer’s National Insurance, the Apprenticeship Levy, company pension contributions and holiday pay. There’s a lot here; so if a new brolly user is not made aware of them, they could feel aggrieved when these deductions are applied.

The umbrella company takes their margin, which is their income from charging out their employee’s time. This is how umbrella companies fund their business, including the cost of insurances and statutory payments like sick pay and maternity/paternity pay. Typically an umbrella margin will be between £20.00 and £30.00 for a weekly payment. The umbrella will also take the other costs mentioned above, all from the charge out rate paid to them by the agency.

As you can see, the above operation of an umbrella company is similar to the model used in other businesses. For example, if you were to hire a solicitor who charges £200 an hour, that isn’t what the solicitor personally earns. The solicitor’s legal practice charges you £200 an hour and pays their employee -- the solicitor -- less than that, having covered the costs of running their business.

So if it’s that simple, where does the confusion and disquiet come from?

Where brollies are not blameless

One possible source is a lack of resource given to making sure newcomers to umbrella companies (often shortened to ‘brollies’ or also known as ‘payroll companies’), understand what’s happening. The BBC Yorkshire article quotes a construction worker and a supply teacher who talk about their dissatisfaction with umbrella employment. Both give the impression that they’d had little choice but to sign-up with an umbrella company, and from their complaints they clearly didn’t understand how pay is calculated. This should have been clearly explained to them, and it can be argued that this lack of understanding represents a failure by their umbrella companies. Regrettably, this situation is not as rare as we’d like it to be.

For example, often contractors will be given a choice of two rates; an agency PAYE rate, which is the rate that would be paid directly to the contractor through the agency’s in-house payroll and an uplifted ‘limited company’ rate, which is the charge out rate the agency would pay to another business, for example an umbrella company.

The agency PAYE rate will be the lower of the two, as it doesn’t include an uplift for the umbrella’s margin and costs.

The lower, PAYE rate is the contractor’s pay rate so it wouldn’t be unreasonable to assume that the uplifted rate is as well. If appropriate care is not taken, it may not be clear to the contractor that the uplifted rate is the charge out rate, rather than their pay. This can leave them with an unrealistic expectation and they will feel understandably aggrieved when they discover the truth, no matter how fair and correct that truth may be! A good umbrella company will put considerable effort into ‘on-boarding’ new contractors, making sure their questions are answered and checking their understanding, to avoid confusion.

Further charges

Another accusation against umbrella companies is that they offer no benefit to the contractor. Umbrellas are accused of being greedy middle-men, taking profits out of the supply chain and bringing nothing of value to it.

Once again, those making this claim treat umbrella companies as offering nothing more than outsourced payroll, which is some distance from the truth. Umbrella companies offer full employment, including all the associated rights and protections, often to workers who would otherwise not have them. They also offer confidence that tax and national insurance have been calculated and paid correctly. This provides a safe route into contracting for people who would otherwise not consider it, increasing the range of skills available to UK companies.

Of course, we’re not saying that the payroll industry is free of bad practice and exploitation. A long history of chaotic legislation and sparse enforcement has allowed rogues to emerge, and though in general things are much better than they were, some do still survive. Our advice, to agencies and contractors alike, is to make sure your umbrella company is an accredited member of a trade body such as the FCSA, or has a long history of placing contractors successfully; or a long list of testimonials you can verify. A trade body is arguably better though, as with the FCSA, for example, accredited members are independently audited against a rigorous code of compliance, and have demonstrated a firm commitment to doing things properly.

Final thought

As a long-standing champion of the temporary workforce, it’s disappointing for us to see umbrella companies being maligned in the mainstream press and elsewhere, particularly when the root of it is a failure to understand what umbrella companies do. We hope that this article has gone some way to clearing up this misunderstanding.

31st March, 2017

Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.